Labor: Temporary staffing and PEOs

Employers that have decided to supplement their workforce with temporary or permanent workers must be aware of the nature of the assignment and their responsibilities under their state’s workers’ compensation laws and policies. There are five basic staffing arrangements:

1. Temporary Services. This is the oldest and most frequently used of the staffing arrangements. The employer retains a staffing company to provide its workers for a defined period. These positions may be needed for a high-volume project or result from a current employee taking an extended leave. The arrangement is contractual and at no time is the temporary staff member an employee of the contracting employer.

2. Long-Term and Contract Staffing. This can take on many different contract terms and often arises for long-term project or off-site customer services. The assigned worker contractually remains the staffing company’s employee. However, over an extended period of time—usually more than one year—and depending on the employer’s supervisory role, joint employment issues can arise.

3. Payrolling/Professional Employer Organizations (PEO). This system involves an outside organization—often called an Employee Leasing Company (ELC)—providing payroll services and becoming the employer of all or part of the customer employer’s workforce. The difference between payrolling and PEO arrangements is limited to the duration and number of employees involved. Payrolling generally involves only a subset of the employer’s workforce. PEO arrangements apply when the employer surrenders all employees to the ELC. In these cases, the PEO is established as the employer of record. As a result, it is the PEO that assumes liability for workers’ compensation and related employee services.

4. Outsourcing. In this arrangement, a staffing company with a specialty in a particular field or industry accepts responsibility for a performing a specific company function on a long-term or on-going basis. Generally, the employees are employed by the staffing firm and are supervised by it while on the customer’s site. An example would be information technology service.

5. Temporary-to-Permanent. This arrangement allows customers to use the candidate’s expertise without an initial long-term commitment. This is helpful to employers that are looking for a particular skill set but which do not have the time or resources to conduct an in-depth recruiting or hiring function.

Issues often arise in the above arrangements as to the responsible party for the provision of workers’ compensation benefits if an assigned worker is injured. In all five arrangements, the employee remains employed by the staffing company. It is the staffing company or PEO that is required to provide workers’ compensation coverage consistent with the statutory requirements of the employees’ work state. If, however, the staffing company has no workers’ compensation coverage, the employee in most states will be identified as a “statutory employee” of the customer and the customer’s workers’ compensation carrier will be responsible for providing coverage.

For employers that wish to use staffing companies, PEOs or ELCs there are affirmative steps that to insure that workers’ compensation coverage is in place:

1. Do not accept oral representations that “all our workers are covered by our comp.” Require contractual terms that include confirmation that workers’ compensation is provided consistent with state limits.

2. Require the staffing company to provide certificates of insurance at least every six months to verify coverage remains in place.

3. If possible, negotiate to be an additional insured or require the staffing company to provide an alternate employer endorsement under the terms of the workers’ compensation policy.